Hungary Retail Sales February 2008

Well there are no real surprises in this months retail sales data since Hungarian retail sales dropped by 0.2% month on month in February, following a 0.1% increase January, according to data adjusted for calendar and seasonal effects from the Central Statistics Office (KSH). I say this is not surprising since there were only two months last year when the KSH reported a month on month rise. At the same time on a working day adjusted basis retail sales fell by 2.5% over February 2007. Sine the annual drop was by 3.0% in January and 4% in December we could say that the rate of decline is now slowing, and that we should expect this situation to continue.

If we look at the volume index for industrial sales chart then the position becomes abundantly clear, with sales having peaked in the middle of 2006 and headed steadily down since that point.



Combined sales of cars, car parts and fuel (which do not a part of European statistical systems) were up, and totalled HUF 163.24 billion in Feb, or an annual rise of 2.6% which compares with a 1.4% fall in January.

Really as I say, I don't think we should expect this situation to change anytime soon, and I hold this view because of the appreciation I have of Hungary's internal consumption dynamics, an appreciation which I would say basically sets me apart from the other analysts working the Hungarian economy.

Hungary's domestic consumption as can be seen from the chart below actually peaked in 2002., and since 2004 it has not be especially strong. It is now in full retreat. Would anyone like to tell me when it will recover, and by how much? I certainly can't tell you, but I certainly strongly doubt we will ever see the 2002 level again, and I am even rather unconvinced we will get back to the 2005 level. My intuition is that Hungary will now become an export driven economy.

Basically I the reasons I hold to my view are based on the differences I have in my appreciation of what the whole idea of "convergence" means in an East European context, and I hold to my view due to the special importance I attribute to demographic factors in the economic growth process.

In order to illustrate what I mean I would like to close this post by taking a quick look at historical German private consumption data. One of the core arguments I am presenting on this blog is the idea that part of the issue facing East European economies like the Hungarian one is the population ageing situation. This argument is being by and large ignored by mainstream analysts, but simply ignoring a problem doesn't make it go away.

Most analysts, as I have been arguing, tend to look at what is happening in Hungary on a "convergence" cyclical basis. But there are reasons for thinking that this view may be inadequate. Hungary's economy grew for ten years up to 2005, and then the growth process started to grind to a halt. Indeed you could argue that the whole wasy that the fiscal deficit got so out of hand in Hungary was a result of the slowdown in domestic consumtion and economic growth. Now Germany also had a very significant consumer boom and correction back in 1995, and if you look at the chart below German domestic consumption has never recovered.

And indeed if we look at the next chart we will see that in 2007 (following the significant VAT rise induced local spike in the 4th quarter of 2006) German private consumption has been steadily declining across 2007, and this despite a very rapid rate of new job creation and a substantial drop in unemployment. I think people should at least think about this carefully, and ask themselves whether or not Hungary may now follow this course, becoming an export driven economy. At least, I would argue, there are prima facie reasons for considering this outcome to be a real and present possibility.